Why the Supreme Court sided with eBay

Patent owners do not have an automatic right to an injunction that could cripple the business of an infringer, according to the US Supreme Court. In a qualified victory for eBay, the Justices explained where two lower courts had gone wrong.

Background

A small company in Virginia called MercExchange sued eBay, claiming the auction company's 'Buy It Now' feature infringed a business method patent that covered the conduct of fixed-priced sales over the internet. A District Court agreed and awarded damages of almost $35 million (later reduced to $29.5 million) – but refused to switch off the feature on eBay's site. Then the Court of Appeals overruled that refusal and said a permanent injunction should be granted. EBay appealed.

Yesterday, the Supreme Court said that both courts made mistakes. But instead of ruling on whether the feature should be removed from eBay's site or not, it explained the mistakes of the lower courts and ordered further proceedings.

Analysis

The approach of the Court of Appeals for the Federal Circuit was wildly inaccurate, it seems. It articulated a "general rule," unique to patent disputes, "that a permanent injunction will issue once infringement and validity have been adjudged" except in the "unusual" case, under "exceptional circumstances" and "in rare instances … to protect the public interest."

There is no such rule, said the Supreme Court in its unanimous verdict. The proper approach to the question of whether to award a permanent injunction is to apply a four-point test. The plaintiff must demonstrate:

That it has suffered an irreparable injury;

That remedies available at law are inadequate to compensate for that injury;

That considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and

That the public interest would not be disserved by a permanent injunction.

This test is well-established but the Court of Appeals lost sight of it. The US District Court for the Eastern District of Virginia was closer to the mark – it did apply the four-point test – but its application was flawed, according to Justice Clarence Thomas who delivered the opinion of the Court.

A court has discretion to grant or deny injunctive relief, but its decision must be consistent with traditional principles of equity, he said. These principles apply to patent cases as they do to other cases. But the District Court failed to follow the principles of equity, according to Justice Thomas. He said that it appeared to adopt expansive principles suggesting that injunctive relief could not apply to a broad swath of cases.

Justice Thomas rebuked the District Court for suggesting that a "plaintiff's willingness to license its patents" and "its lack of commercial activity in practicing the patents" would be sufficient to establish that the patent holder would not suffer irreparable harm if an injunction was not issued.

Traditional equitable principles do not permit such broad classifications, he said. Some patent holders, such as university researchers or self-made inventors, might reasonably prefer to license their patents, rather than undertake efforts to secure the financing necessary to bring their works to market themselves. "Such patent holders may be able to satisfy the traditional four-factor test," wrote Justice Thomas, "and we see no basis for categorically denying them the opportunity to do so."

But at least the District Court was applying the right test, unlike the Court of Appeals.

Justice Kennedy added some of his own thoughts. "An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead primarily for obtaining licensing fees," he wrote.

He continued: "For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent."

Some people call such firms patent trolls; but are they doing anything wrong?

Justice Kennedy continued: "When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest."

He said that an injunction may have different consequences "for the burgeoning number of patents over business methods, which were not of much economic and legal significance in earlier times. The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test."

The District Court must now reconsider whether an injunction is appropriate. EBay has previously reported that it changed its 'Buy It Now' service after the District Court ruling in 2003 to avoid future infringement, so the ultimate decision may not affect the operation of its business.

Reaction

MercExchange said in a statement last night: "MercExchange is pleased that the Supreme Court has ordered the district court to reconsider MercExchange's request for an injunction to force eBay, Inc., to stop infringing MercExchange's valid patent. We are confident that the district court, when it fairly applies the traditional principles of equity set forth in the Supreme Court's opinion, will grant the injunctive relief to which MercExchange is entitled."

According to reports, eBay said it was "extremely gratified" by the decision and expects the District Court to deny an injunction again.

Deborah Bould, a partner with Pinsent Masons who specialises in intellectual property, said the case is good news for US companies that fear lawsuits from pure licensing organisations.

"EBay was challenging the same court practices that nearly shut down the BlackBerry service in the US," she said. "The Supreme Court has said that an injunction is not an automatic right once infringement is proved on a valid patent and there are other factors to consider. The precise impact won't be known until the lower Courts interpret the decision."

Bould speculated that if these circumstances came before a court in Britain, a permanent injunction seems unlikely.

"The UK has a provision in its patent laws that if demand for a patented product is not being met on reasonable terms, a would-be licensee can apply to the Patent Office for a compulsory licence – in effect a deterrent to so-called 'patent trolls'," she said.

She added that courts in Scotland and England have a discretion to refuse an injunction in an exceptional case and award damages in lieu.